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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Fifth Circuit: Pre-petition Payout of Insurance Proceeds Should Be Classified As a 'Transfer of An Interest'

By Francis J. Lawall and Brenden S. Dahrouge
December 01, 2023

Section 547 of the Bankruptcy Code provides for the potential recovery of transfers of a debtor's property occurring within 90 days of bankruptcy. Typically, preference actions involve payments to vendors who previously did business with the debtor on credit. However, vendors are not the only ones who can be tangled up in preference litigation. In a recent case before the U.S. Court of Appeals for the Fifth Circuit, the question of whether a payout of insurance proceeds to a tort claimant, made pre-petition pursuant to Texas state insurance law, should be classified as a "transfer of an interest of the debtor in property" under 11 U.S.C. Section 547. See, Law Office of Rogelio Solis v. Curtis, No. 23-40125, 2023 U.S. App. LEXIS 26621, at *2 (5th Cir. Oct. 6, 2023). In upholding the bankruptcy court's determination that the payment of insurance proceeds could be such a transfer, the Fifth Circuit underscored the complex interplay between state law, bankruptcy law and the rights of creditors in bankruptcy proceedings.

On Dec. 19, 2020, a tractor-trailer owned by Josiah's Trucking LLC (Josiah's Trucking) collided with another vehicle, causing the death of two individuals. At that time, Josiah's Trucking held insurance coverage with Brooklyn Specialty Insurance Co. RRG, Inc. which carried a policy limit of $1,000,000. The mother of one of the victims, Ana Gomez, and the family of the other, the Tellez family, each sought legal representation and initiated insurance claims. The Law Firm of Rogelio Solis, PLLC (the Solis Firm) represented Ana Gomez, while the Tellez family contacted Escobar & Cardenas to represent their interests.

Shortly after the accident, negotiations ensued between the Tellez family and Brooklyn Specialty, following which a lawsuit was filed against Josiah's Trucking, its owner, and the driver. In contrast, Gomez, represented by the Solis Firm, submitted a Stowers demand under Texas law for the policy limit. On Jan. 12, 2021, Brooklyn Specialty transferred the full $1,000,000 to the Solis Firm's IOLTA account in settlement of the Gomez claims. Notice of payment was promptly communicated to the Tellez family that the policy had been exhausted. Shortly thereafter, the Tellez family, initiated an involuntary bankruptcy proceeding against Josiah's Trucking (hereinafter the debtor). On Feb. 9, the interim trustee commenced an adversary proceeding against Gomez and the Solis Firm under Bankruptcy Code Sections 547 and 550 to recover the insurance proceeds. The defendants sought to dismiss the action arguing that the insurance proceeds were not property of the debtor's estate since it held "neither legal title in nor a contractual right to the policy proceeds, and otherwise lacked control over their disbursement."

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